The 25 per cent drop in the price of oil since July is likely to lift economic growth prospects, improve terms of trade, and have a potentially positive credit impact for a number of Asia-Pacific economies if the lower prices are sustained below US$90 a barrel through 2015, in line with our latest forecasts, says Fitch Ratings.

The credit ratings agency has lowered its forecast for the price of brent crude to average US$87/bbl through 2015 and US$90/bbl for 2016, down from its September forecasts of US$100/bbl and US$95/bbl, respectively.

Here's how lower oil prices will benefit Asia, accordint to Fitch:

1. Most major Asian economies - including China, Japan, Korea and Thailand - would see an effective overall income boost from sustained lower oil prices.

In addition, large oil-importing countries such as Indonesia and India are among the best positioned to see a positive impact on sovereign credit profiles, although the broader policy response will matter too.

Net oil import bills range significantly, from greater than 10 per cent of GDP for Thailand to less than 2 per cent for Bangladesh and Vietnam. Korea, Japan and China have net import bills of 6 per cent, 3 per cent and just over 2 per cent of GDP, respectively.

2. For consumers, there would be a positive consumption effect from falling retail energy prices.

3. Disinflation as a result of lower oil prices could also contribute to GDP growth less directly in some countries, by facilitating a more accommodative monetary policy than would otherwise be followed.

Notably, several key Asian economies, including Japan, have been increasingly relying on liquefied natural gas (LNG) as part of their energy mix, and Asian LNG prices are linked to Brent crude.

4. A combined positive impact on fiscal accounts, economic growth and terms of trade, would be particularly beneficial for the sovereign credits of countries which are both net oil importers and facing external adjustment pressures (pressures on their currencies because of capital outflows), including Indonesia and India. Lower oil prices will help to ease the trade-offs faced by these economies as they aim to bolster growth while reducing external account deficits.

Both the Indian and Indonesian governments have already taken advantage of the price decline. In India, diesel prices were deregulated on 18 October. The direct impact on our headline fiscal forecasts is expected to be limited, while this will make the fiscal accounts more robust against future oil shocks, since both diesel and petrol prices are now determined by the market.

In Indonesia, the new administration under President Joko Widodo raised the administered price of fuel by over 30 per cent on 18 November. Roughly 15 per cent of total government spending (2.4 per cent of GDP) is allocated to fuel subsidies, according to the state budget. In addition to direct effects on the state budget, the price hike provides a clear, positive signal of the new government's intentions to swiftly implement its reform agenda.

5. The extent to which these countries are able to realise the potential fiscal benefits will be determined at least partly by how policy makers respond - whether they use budget windfalls to increase spending or reduce deficits.

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